TMI Blog2010 (7) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... tion would be more appropriate as that would fulfil the accrual concept as well as the matching concept -, a categoric stand was made that the assessee was making a reasonable estimate of the provision for warranty claims and that it was consistently adopting a method of taking the average of actual settlements of the immediately preceding three years while working out the provision based on the percentage of current year's sales. - the assessee herein made a scientific approach while making a provision for warranty account for the relevant years and therefore, there was no scope to disallow the claim made by the assessee – decided in favor of assessee - 489 to 494 of 2010 - - - Dated:- 5-7-2010 - Coram:- THE HON'BLE MR.JUSTICE F.M.IBRA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l went wrong in allowing the said deduction. Learned standing counsel however fairly brought to our notice a recent decision of the Hon'ble Supreme Court reported in (2009) 314 ITR 62 (SC) (Rotork Controls India Pvt. Ltd. v. Commissioner of Income-tax), wherein the Hon'ble Supreme Court dealt with this issue in depth and has laid down the principles while examining a claim for warranty provision by way of allowable deduction. Paragraph 14 of the said decision, where the principle has been laid down, reads as under: "14. In this case, we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives a warranty for a period of 36 months from the date of supply. The said company consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilised at the end of the period prescribed in the warranty. Therefore, the company should scrutinise the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not have interfered with the decision of the Tribunal in this case." 4. A perusal of the principles stated therein shows that while there could be three broad options available to a company while making a provision viz., (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent. of the turnover of the company based on past experience (historical trend), the Hon'ble Supreme Court while holding the first two options would not be appropriate, the third option would be more appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in paragraph 7. Similarly, the details of the year-wise sales and the percentage, at which the quantum of provision for warranty was worked out in each year by the assessee-company were also furnished. After referring to those figures furnished in the form of statements and after considering the stand of the Revenue as well as the assessee, the Tribunal has rendered its finding as under in paragraph 11. "11. It is seen from the chart reproduced in paragraph (8) above that the multiplying factor was 3.99 in AY 2002-03 and that it came down to 0.67 in 2007-08. Since the basis of computation is the average of the immediately preceding three year's actual settlements, the accumulated credit balance in the 'Provision for Warranty Account' wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depending upon the trend of warranty settlements over a period of time corresponding to the sales figures, the percentage of provisions made was not inconsistent and as rightly held by the Tribunal, there was no arbitrary approach made by the assessee while making the provision for warranty claims. Therefore, looked at from any angle, we do not find any flaw in the order of the Tribunal in having decided to confirm the order of the Commissioner of Income-tax (Appeals) for the relevant years. We are, therefore, not inclined to entertain the appeals, as we do not find any question of law, much less substantial question of law arising in these appeals. These appeals fail and the same are dismissed. No costs. Consequently, M.P.Nos.1 of 2010 (5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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